October 30, 2009

By Daugherty, Scott
Publication: Texas Banking
Date: Thursday, October 1 2009

Bankers who have recently undergone compliance exams are reporting that the Home Mortgage Disclosure Act (HMDA) continues to be a hot issue, particularly in reporting spreads.

According to one Texas banker, whose bank was examined in August, examiners first looked for fair lending disparities in HMDA data. Then, they conducted a non HMDA Consumer Fair Lending review of a sample of approximately 200 unsecured consumer loans. They did an initial stratification of accounts based on surnames. They were looking for disparities in the ratio of Hispanic to non-Hispanic surnames.

The banker reported that the examiners were focusing solely on rate disparities whether the bank charged more to a protected class than a non-protected class. They did not take into account that the rate differential could be explained by the size of the loans. Normally, any disparities found in the HMDA data would be required to be sent off to the Washington office, putting a halt to the examination until the analysis is conducted. Instead, the Dallas office made the call to have the onsite examiners review the underwriting reasons and come to a conclusion.

The banker, who noted that he has been through Fair Lending examinations before, said the recent exam didn't follow the exact set of procedures of previous exams.

He advises bankers to examine how they determine "date action taken" for HMDA data. For many years, his bank based the date on the promissory note date; the examiners, however, said the bank should use the actual settlement date.

In addition, the examiners looked at 42 refinances and home improvement loans, and found disparities in nine. Banks should make sure that what they say they are doing in the interview with examiners is truly what is being done; the examiners are checking everything said in the interviews.

The banker also reported that procedures at the regional and Washington offices are slowing down exams. He cautioned bankers to do internal testing before examiners arrive. The most important thing for a bank is to have pricing mechanisms in place - a rate matrix that is race and gender-blind. If the bank deviates for whatever reason from the rate matrix, the file must include documentation that explains why this occurred.

All terms used must be defined as well. For example, the bank was asked to define "good" and "long-time" customers, as well as "good credit."

The examiners were also interested in recent delinquencies and charge-offs. They also focused on the bank officers and their years of experience.

These are the experiences of one TBA member bank and are being reported to help other banks facing examinations. If your bank has recently been examined and you would like to share information about your experiences, please contact me at scott@texasbankers.com or 512-472-8388. Your information could be very helpful to your fellow bankers.

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